Will the Fed's New Regulations Prevent Recovery?

On Friday, the Federal Reserve announced a plan to expand its supervision of U.S. banks, according to the San Francisco Business Times. The Fed will now annually review the capital of all banks with over $50 billion in assets. If the Fed believes that a bank is not adequately capitalized to handle a downturn in the U.S. economy, the Fed can require that the bank raise capital. This regulation may be used in the future to prevent banks from using their capital to pay dividends or buy back stock. This comes just days after an awkward interaction between the Chairman of the Federal Reserve—Ben Bernanke—and the CEO of JP Morgan Chase JPM—Jamie Dimon. On Tuesday, Bernanke gave a speech to a group of bankers, including Dimon. In the following question and answer session, Dimon asked Bernanke if he believed that new banking regulations would stifle economic recovery. Bernanke, citing foreign banks, did not believe that the U.S. was in danger of over-regulation. Action Items Bullish: Traders who believe that the Fed's new regulation will be bullish for the U.S. economy might want to consider the following trades:

• Buy ProShares Ultra Dow30 DDM. DDM is a long play on the Dow Jones, which may rally if the U.S. economy improves.
• Buy PowerShares DB US Dollar Bullish Index UUP. A long play on the U.S. dollar, UUP may rally if the dollar appreciates assuming the U.S. economy strengthens.

Bearish: Traders who believe that Dimon's point was valid and that the U.S. risks stifling economic growth with burdensome regulations may consider taking positions in the following:

• ProShares Short Financials SEF is a short play on the banks. If the Fed's new regulation hurts the banks, it may be reflected in stock prices.
• PowerShares DB US Dollar Bearish Index UDN is a short play on the dollar. If the U.S. financial system is hurting, the dollar may depreciate.

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